QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 1-4462

STEPAN COMPANY

(Exact name of registrant as specified in its charter)

Delaware

36-1823834

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification Number)

Edens and Winnetka Road, Northfield, Illinois 60093

(Address of principal executive offices)

Registrant’s telephone number (847) 446-7500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one): Large accelerated filer

x

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

Outstanding at July 21, 2016

Common Stock, $1 par value

22,364,316 Shares

Part I FINANCIAL INFORMATION

Item 1 - Financial Statements

STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited

(In thousands, except per share amounts)

Three Months Ended

June 30

Six Months Ended

June 30

2016

2015

2016

2015

Net Sales

$

454,603

$

452,414

$

900,500

$

912,865

Cost of Sales

361,672

372,902

714,070

756,911

Gross Profit

92,931

79,512

186,430

155,954

Operating Expenses:

Selling

14,572

14,265

28,262

27,262

Administrative (a)

17,692

17,482

36,392

35,244

Research, development and technical services

14,256

12,597

28,038

24,387

Deferred compensation expense (a)

2,434

6,573

5,154

8,150

48,954

50,917

97,846

95,043

Gain on sale of product line

—

—

—

2,862

Business restructuring

(1,061

)

—

(1,061

)

—

Operating Income

42,916

28,595

87,523

63,773

Other Income (Expense):

Interest, net

(3,417

)

(2,869

)

(7,031

)

(6,923

)

Loss from equity in joint ventures (Note 16)

—

(1,815

)

—

(3,055

)

Other, net (Note 13)

(303

)

235

(828

)

887

(3,720

)

(4,449

)

(7,859

)

(9,091

)

Income Before Provision for Income Taxes

39,196

24,146

79,664

54,682

Provision for Income Taxes

11,326

7,205

24,137

16,455

Net Income

27,870

16,941

55,527

38,227

Net Income Attributable to

Noncontrolling Interests (Note 2)

(5

)

(27

)

(8

)

(43

)

Net Income Attributable to Stepan Company

$

27,865

$

16,914

$

55,519

$

38,184

Net Income Per Common Share Attributable to Stepan Company (Note 9):

Basic

$

1.22

$

0.74

$

2.44

$

1.68

Diluted

$

1.21

$

0.74

$

2.42

$

1.67

Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 9):

Basic

22,760

22,742

22,746

22,731

Diluted

22,958

22,871

22,920

22,850

Dividends Declared Per Common Share

$

0.19

$

0.18

$

0.38

$

0.36

(a)

For the three and six months ended June 30, 2015, deferred compensation expense was included in the administrative expense line. The 2015 amounts have been classified separately to conform to the current year presentation.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

3

STEPAN COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In thousands)

June 30, 2016

December 31, 2015

Assets

Current Assets:

Cash and cash equivalents

$

190,411

$

176,143

Receivables, net

285,058

249,602

Inventories (Note 6)

180,651

170,424

Other current assets

23,219

23,404

Total current assets

679,339

619,573

Property, Plant and Equipment:

Cost

1,477,841

1,446,098

Less: accumulated depreciation

(914,231

)

(890,635

)

Property, plant and equipment, net

563,610

555,463

Goodwill, net

11,292

11,265

Other intangible assets, net

16,561

17,957

Long-term investments (Note 3)

21,225

20,910

Other non-current assets (Note 18)

12,448

13,224

Total assets

$

1,304,475

$

1,238,392

Liabilities and Equity

Current Liabilities:

Current maturities of long-term debt (Note 12)

$

14,377

$

18,806

Accounts payable

144,161

128,605

Accrued liabilities

83,720

95,833

Total current liabilities

242,258

243,244

Deferred income taxes

15,314

9,455

Long-term debt, less current maturities (Note 12 and 18)

306,980

312,548

Other non-current liabilities

119,664

114,761

Commitments and Contingencies (Note 7)

Equity:

Common stock, $1 par value; authorized 60,000,000 shares;

Issued shares 25,792,832 in 2016 and 25,709,391 shares in 2015

25,793

25,709

Additional paid-in capital

150,834

144,601

Accumulated other comprehensive loss (Note 10)

(114,055

)

(125,088

)

Retained earnings

627,250

580,208

Less: Common treasury stock, at cost, 3,470,084 shares in 2016

and 3,428,541 shares in 2015

(70,938

)

(68,446

)

Total Stepan Company stockholders’ equity

618,884

556,984

Noncontrolling interests (Note 2)

1,375

1,400

Total equity

620,259

558,384

Total liabilities and equity

$

1,304,475

$

1,238,392

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

4

STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In thousands)

Six Months Ended June 30

2016

2015

Cash Flows From Operating Activities

Net income

$

55,527

$

38,227

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization

36,453

32,859

Deferred compensation

5,154

8,150

Realized and unrealized losses (gains) on long-term investments

205

(642

)

Stock-based compensation

4,448

3,162

Deferred income taxes

6,146

(1,953

)

Other non-cash items

1,165

508

Changes in assets and liabilities:

Receivables, net

(33,586

)

(679

)

Inventories

(8,664

)

(245

)

Other current assets

335

(2,438

)

Accounts payable and accrued liabilities

8,586

3,386

Pension liabilities

365

358

Environmental and legal liabilities

767

(1,408

)

Deferred revenues

(564

)

(781

)

Excess tax benefit from stock options and awards

(893

)

(236

)

Net Cash Provided By Operating Activities

75,444

78,268

Cash Flows From Investing Activities

Expenditures for property, plant and equipment

(40,696

)

(54,021

)

Business acquisition (Note 17)

—

(5,133

)

Proceeds from sale of product line (Note14)

—

3,262

Other, net

(3,533

)

(1,746

)

Net Cash Used In Investing Activities

(44,229

)

(57,638

)

Cash Flows From Financing Activities

Revolving debt and bank overdrafts, net

(3,971

)

(9,435

)

Other debt repayments

(6,033

)

(2,503

)

Dividends paid

(8,477

)

(8,061

)

Company stock repurchased

(2,408

)

—

Stock option exercises

1,351

359

Excess tax benefit from stock options and awards

893

236

Other, net

(235

)

(275

)

Net Cash Used In Financing Activities

(18,880

)

(19,679

)

Effect of Exchange Rate Changes on Cash

1,933

(3,801

)

Net Increase (Decrease) in Cash and Cash Equivalents

14,268

(2,850

)

Cash and Cash Equivalents at Beginning of Period

176,143

85,215

Cash and Cash Equivalents at End of Period

$

190,411

$

82,365

Supplemental Cash Flow Information

Cash payments of income taxes, net of refunds

$

11,074

$

6,873

Cash payments of interest

$

7,442

$

6,046

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

5

STEPAN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Unaudited

1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein have been prepared by Stepan Company (Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position as of June 30, 2016, and its results of operations for the three and six months ended June 30, 2016 and 2015, and cash flows for the six months ended June 30, 2016 and 2015, have been included. These financial statements and related footnotes should be read in conjunction with the financial statements and related footnotes included in the Company’s 2015 Form 10-K.

2.

RECONCILIATIONS OF EQUITY

Below are reconciliations of total equity, Company equity and equity attributable to noncontrolling interests for the six months ended June 30, 2016 and 2015:

(In thousands)

Total Equity

Stepan

Company

Equity

Noncontrolling Interests’

Equity (3)

Balance at January 1, 2016

$

558,384

$

556,984

$

1,400

Net income

55,527

55,519

8

Dividends

(8,477

)

(8,477

)

—

Common stock purchases (1)

(2,643

)

(2,643

)

—

Stock option exercises

1,351

1,351

—

Defined benefit pension adjustments, net of tax

1,129

1,129

—

Translation adjustments

9,898

9,931

(33

)

Derivative instrument activity, net of tax

(27

)

(27

)

—

Other (2)

5,117

5,117

—

Balance at June 30, 2016

$

620,259

$

618,884

$

1,375

(In thousands)

Total Equity

Stepan

Company

Equity

Noncontrolling Interests’

Equity (3)

Balance at January 1, 2015

$

536,944

$

535,546

$

1,398

Net income

38,227

38,184

43

Dividends

(8,061

)

(8,061

)

—

Common stock purchases (1)

(273

)

(273

)

—

Stock option exercises

359

359

—

Defined benefit pension adjustments, net of tax

1,499

1,499

—

Translation adjustments

(19,195

)

(19,197

)

2

Derivative instrument activity, net of tax

(26

)

(26

)

—

Other (2)

2,488

2,488

—

Balance at June 30, 2015

$

551,962

$

550,519

$

1,443

(1)

Includes the value of Company shares purchased in the open market and the value of Company common shares tendered by employees to settle minimum statutory withholding taxes related to the receipt of performance awards and deferred compensation distributions.

Reflects the noncontrolling interest in the Company’s China joint venture.

6

3.

FAIR VALUE MEASUREMENTS

The following describe the financial instruments held by the Company at June 30, 2016, and December 31, 2015, and the methods and assumptions used to estimate the instruments’ fair values:

Cash and cash equivalents

Carrying value approximated fair value because of the short maturity of the instruments.

Derivative assets and liabilities

Derivative assets and liabilities included the foreign currency exchange and interest rate contracts discussed in Note 4. Fair value and carrying value were the same because the contracts were recorded at fair value. The fair values of the foreign currency contracts were calculated as the difference between the applicable forward foreign exchange rates at the reporting date and the contracted foreign exchange rates multiplied by the contracted notional amounts. The fair values of the interest rate swaps were calculated as the difference between the contracted swap rate and the current market replacement swap rate multiplied by the present value of one basis point for the notional amount of the contract. See the table that follows the financial instrument descriptions for the reported fair values of derivative assets and liabilities.

Long-term investments

Long-term investments included the mutual fund assets the Company held to fund a portion of its deferred compensation liabilities and all of its non-qualified supplemental executive defined contribution obligations (see the defined contribution plans section of Note 8). Fair value and carrying value were the same because the mutual fund assets were recorded at fair value in accordance with the fair value option rules established by the Financial Accounting Standards Board (FASB). Fair values for the mutual funds were calculated using the published market price per unit at the reporting date multiplied by the number of units held at the reporting date. See the table that follows the financial instrument descriptions for the reported fair value of long-term investments.

Debt obligations

The fair value of debt with original maturities greater than one year comprised the combined present values of scheduled principal and interest payments for each of the various loans, individually discounted at rates equivalent to those which could be obtained by the Company for new debt issues with durations equal to the average life to maturity of each loan. The fair values of the remaining Company debt obligations approximated their carrying values due to the short-term nature of the debt. The Company’s fair value measurements for debt fall in level 2 of the fair value hierarchy.

At June 30, 2016, and December 31, 2015, the fair values of debt and the related carrying values, including current maturities, were as follows (the fair value and carrying value amounts are shown without regard to unamortized debt issuance costs):

(In thousands)

June 30,

2016

December 31,

2015

Fair value

$

333,229

$

331,183

Carrying value

322,550

332,623

The following tables present financial assets and liabilities measured on a recurring basis at fair value as of June 30, 2016, and December 31, 2015, and the level within the fair value hierarchy in which the fair value measurements fall:

(In thousands)

June

2016

Level 1

Level 2

Level 3

Mutual fund assets

$

21,225

$

21,225

$

—

$

—

Derivative assets:

Foreign currency contracts

339

—

339

—

Total assets at fair value

$

21,564

$

21,225

$

339

$

—

Derivative liabilities:

Foreign currency contracts

$

591

$

—

$

591

$

—

Interest rate contracts

86

—

86

—

Total liabilities at fair value

$

677

$

—

$

677

$

—

7

(In thousands)

December

2015

Level 1

Level 2

Level 3

Mutual fund assets

$

20,910

$

20,910

$

—

$

—

Derivative assets:

Foreign currency contracts

112

—

112

—

Total assets at fair value

$

21,022

$

20,910

$

112

$

—

Derivative liabilities :

Foreign currency contracts

$

305

$

—

$

305

$

—

Interest rate contracts

53

—

53

—

Total liabilities at fair value

$

358

$

—

$

358

$

—

4.

DERIVATIVE INSTRUMENTS

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by the use of derivative instruments is foreign currency exchange risk. The Company holds forward foreign currency exchange contracts that are not designated as any type of accounting hedge as defined by U.S. GAAP. The Company uses these contracts to manage its exposure to exchange rate fluctuations on certain Company subsidiary cash, accounts receivable, accounts payable and other obligation balances that are denominated in currencies other than the entities’ functional currencies. The forward foreign exchange contracts are recognized on the balance sheet as either an asset or a liability measured at fair value. Gains and losses arising from recording the foreign exchange contracts at fair value are reported in earnings as offsets to the losses and gains reported in earnings arising from the re-measurement of the asset and liability balances into the applicable functional currencies. At June 30, 2016, and December 31, 2015, the Company had open forward foreign currency exchange contracts, all with settlement dates of approximately one month, to buy or sell foreign currencies with U.S. dollar equivalent amounts of $35,754,000 and $31,194,000, respectively.

The Company is exposed to volatility in short-term interest rates and mitigates certain portions of that risk by using interest rate swaps. The interest rate swaps are recognized on the balance sheet as either an asset or a liability measured at fair value. The Company held interest rate swap contracts with notional values of $3,491,000 at June 30, 2016, and $3,724,000 at December 31, 2015. The contracts were designated as cash flow hedges. Period-to-period changes in the fair value of interest rate swap contracts are recognized as gains or losses in other comprehensive income, to the extent effective. As each interest rate swap hedge contract is settled, the corresponding gain or loss is reclassified out of accumulated other comprehensive income (AOCI) into earnings in that settlement period. The latest date through which the Company expects to hedge its exposure to the volatility of short-term interest rates is December 1, 2021.

The fair values of the derivative instruments held by the Company on June 30, 2016, and December 31, 2015, are disclosed in Note 3. Derivative instrument gains and losses for the three- and six-month periods ending June 30, 2016 and 2015, were immaterial. For amounts reclassified out of AOCI into earnings for the three- and six-month periods ended June 30, 2016 and 2015, see Note 10.

5.

STOCK-BASED COMPENSATION

On June 30, 2016, the Company had stock options outstanding under its 2006 Incentive Compensation Plan and stock options, stock awards and stock appreciation rights (SARs) outstanding under its 2011 Incentive Compensation Plan.

Compensation expense recorded for all stock options, stock awards and SARs was as follows:

(In thousands)

Three Months Ended

June 30

Six Months Ended

June 30

2016

2015

2016

2015

$

2,025

$

2,364

$

4,448

$

3,162

The increase in stock-based compensation expense between the six-month periods ended June 30, 2016 and 2015, was primarily attributable to increased compensation related to performance awards. The increase resulted from management’s assessment that the profitability performance metrics for certain grants would be achieved at greater levels than previously estimated.

8

Unrecognized compensation costs for stock options, stock awards and SARs were as follows:

The unrecognized compensation costs at June 30, 2016, are expected to be recognized over weighted-average periods of 1.4 years, 2.1 years and 1.4 years for stock options, stock awards and SARs, respectively.

6.

INVENTORIES

The composition of inventories was as follows:

(In thousands)

June 30, 2016

December 31, 2015

Finished goods

$

129,734

$

124,481

Raw materials

50,917

45,943

Total inventories

$

180,651

$

170,424

Inventories are priced primarily using the last-in, first-out inventory valuation method. If the first-in, first-out inventory valuation method had been used for all inventories, total inventory balances would have been approximately $25,863,000 and $18,171,000 higher than reported at June 30, 2016, and December 31, 2015, respectively.

7.

CONTINGENCIES

There are a variety of legal proceedings pending or threatened against the Company. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time. The Company’s operations are subject to extensive local, state and federal regulations, including the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986 (Superfund). Over the years, the Company has received requests for information related to or has been named by the government as a potentially responsible party (PRP) at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it may incur with respect to these sites.

As of June 30, 2016, the Company estimated a range of possible environmental and legal losses of $21.7 million to $42.4 million. At June 30, 2016, and December 31, 2015, the Company’s accrued liability for such losses, which represented the Company’s best estimate within the estimated range of possible environmental and legal losses, was $21.7 million and $20.9 million, respectively. During the first six months of 2016 and 2015, cash outlays related to legal and environmental matters approximated $0.6 and $1.9 million, respectively.

For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Given the information available, management believes the Company has no liability at these sites. However, in the event of one or more adverse determinations with respect to such sites in any annual or interim period, the effect on the Company’s cash flows and results of operations for those periods could be material. Based upon the Company’s present knowledge with respect to its involvement at these sites, the possibility of other viable entities’ responsibilities for

9

cleanup, and the extended period over which any costs would be incurred, the Company believes that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position.

Following are summaries of the material contingencies at June 30, 2016:

Maywood, New Jersey Site

The Company’s property in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site and other nearby properties (Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between United States Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company has completed various Remedial Investigation Feasibility Studies, and on September 24, 2014, USEPA issued its Record of Decision (ROD) for chemically-contaminated soil. USEPA has not yet issued a ROD for chemically-contaminated groundwater for the Maywood site. Based on the most current information available, the Company believes its recorded liability represents its best estimate of the cost of remediation for the Maywood site. The best estimate of the cost of remediation for the Maywood site could change as the Company continues to hold discussions with USEPA, as the design of the remedial action progresses or if other PRPs are identified. The ultimate amount for which the Company is liable could differ from the Company’s current recorded liability.

In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which requires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil. Based on the Company’s review and analysis of this order, no changes to the Company’s recorded liability for claims associated with soil remediation of chemical contamination were required.

In addition, under the terms of a settlement agreement reached on November 12, 2004, the United States Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985 under which the United States will take title to and responsibility for radioactive waste removal at the Maywood site, including past and future remediation costs incurred by the United States. As such, the Company recorded no liability related to this settlement agreement.

D’Imperio Property Site

During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances at several sites in New Jersey. The Company was named as a PRP in the case United States v. Lightman (1:92-cv-4710 D.N.J.), which involved the D’Imperio Property Site located in New Jersey. In 2016, the PRPs were provided with updated remediation cost estimates which were considered in the Company’s determination of its range of estimated possible losses and liability balance. The change in range of possible losses and liability balance were immaterial. Remediation work is continuing at this site. Based on current information, the Company believes that its recorded liability for claims associated with the D’Imperio site is adequate. However, actual costs could differ from current estimates.

Wilmington Site

The Company is currently contractually obligated to contribute to the response costs associated with the Company’s formerly-owned site at 51 Eames Street, Wilmington, Massachusetts. Remediation at this site is being managed by its current owner to whom the Company sold the property in 1980. Under the agreement, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. To date, the Company has paid the current owner $2.5 million for the Company’s portion of environmental response costs. The Company has recorded a liability for its portion of the estimated remediation costs for the site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ from the current estimates.

The Company and other prior owners also entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site. While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim which may be filed.

The Company believes that based on current information its recorded liability for the claims related to this site is adequate. However, depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ from the current estimates.

10

Mexico Value-Added Tax

In the first quarter of 2015, during an examination of the 2009 and 2010 financial records of the Company’s Mexico subsidiary, local tax authority auditors determined that the Company’s treatment of value-added tax (VAT) for purchase transactions with a certain vendor was incorrect. As a result, the tax authorities concluded that the Company owed past VAT from 2009-2010 along with assessed inflation, penalty and interest charges. Consequently, the Company recorded a liability and corresponding income statement charge for the VAT inflation, penalty and interest charges. The liability included the 2009–2010 assessment of inflation, penalty and interest charges plus an estimated amount for the potential exposure for 2011– 014. The amount recorded was not material to the Company’s results of operations. No charge was recorded for the past unpaid VAT because the Company believes the amount will be recoverable through the normal VAT process. No exposure for years after 2014 exists as the Company remedied the underlying issue that led to the tax authorities’ determination. In February 2016, the Company reached agreement with Mexico’s tax authorities on the amount of inflation, penalty and interest charged for the 2009 and 2010 years under audit. No significant adjustments were required to the previously recorded liability. Depending on the outcomes of future negotiations with Mexico tax authorities regarding the years 2011-2014 and the actual amount of the past VAT that is recovered by the Company, the final actual settlement could differ from the current recorded liability.

8.

POSTRETIREMENT BENEFIT PLANS

Defined Benefit Pension Plans

The Company sponsors various funded qualified and unfunded non-qualified defined benefit pension plans, the most significant of which cover employees in the U.S. and U.K. locations. The U.S. and U.K. defined benefit pension plans are frozen and service benefits are no longer being accrued.